What you need to know for the open: Summer lull or a COVID-19 tidal wave of panic-vol?

  • AUD/USD is the currency pair in focus for this week.
  • Coronavirus developments vs economic recovery are on every trader's playbook. 
  • Key data for the week will kick in with US jobs updates, ISM Manufacturing and the RBA meeting. 

The weekend news has been relatively benign if you exclude the coronavirus headlines and bar some antagonistic moves from the US with respect to US/Sino geopolitical relations.

A risk-off start could be in the pipeline making for trading opportunities 

You can catch-up with the specifics of the weekend news here: 

With a quiet economic calendar for today, we can, instead, look to the week's events with a particular focus on the risk of a global COVID-19 contagion resurgence, the US dollar and data as well as a sneak-peek at the Reserve Bank of Australia meeting. 

Gold's pending regime change 

First and foremost, the price of gold and US equities have been a popular development amongst traders and FXStreet's readership over the course of the coronavirus. 

Here are the latest updates on price analysis for those markets:

On the topic of gold, an interesting development here could be on the verge of taking place, shifting its behaviour from safe-haven asset to inflation hedge product. 

Analysts at TD Securities spotted the possible regime change and argued that "market participants should embrace risk-on behaviour inasmuch as it is driven by improving growth/inflation prospects, which should support gold."

In turn, we expect the yellow metal to remain supported. Conversely, the virus presents the most risk to rising long-term breakevens.

US virus resurgence, a cautionary tale 

Staying with the virus, as there seems there is no getting away from it, global coronavirus cases now exceed 10 million and more than half a million people have died from the respiratory disease, according to Johns Hopkins University. 

The United States accounts for about a quarter of all deaths, yet, looking to the US stock market and economic data, you wouldn't be able to pair the two.

Nevertheless, the economic recovery is not expected to be quick, or indeed complete until there is a vaccine and/or more effective treatment widely available.

July US jobs report could be far more sobering

This week's ISM and weekly jobless claims data will be crucial events on the calendar. 

Last Thursday, we had another big upside surprise for payrolls of 4.8mn while the unemployment rate fell to 11.1%. 

But let's wait for the July data that will probably show a far worse real-time story considering the number of US States dialling back on re-openings. 

However, as supportive of the US outlook as that jobs data may seem, at face value, there are a massive number of people who are claiming unemployment benefits and employment is still 15 million lower than February. Eyes are peeled for this week's latest round of claims. 

While stocks may be resilient for now, how long might it be before speculators are uneased by the constant threat of a no turning back scenario?

The US health secretary Alex Azar has warned the "window is closing" for decisive action to curb the virus as cases there surge.

The worst day yet

The resurgence of COVID-19 cases and hospitalizations across a number of states has taken some of the shine off these indicators and prompted some roll-backs of already-eased containment measures. 

On Friday, US markets were closed for Independence Day, on the same day that the news hit that California reported 8045 coronavirus cases vs 4056 on Thursday, and if you exclude the lab backlog on July 1 that added 3842 cases, this was the worst day yet.

This just goes to show that the virus is far from contained and markets will probably pick up on this when traders walk in. 

DXY's symmetrical triangle means its make or break time

The US dollar index, DXY, is at a make or break within a symmetrical triangle, testing the lower bound between 95.60 and 96.60.

The index has completed. 61.8% retracement and sound support there, leaving scope for a recovery to the top side of the narrowing range, which is coiling towards a breakout one way or the other. 

COVID-19 resurgence goes global

It was wondered whether this would remain confined as a unique problem for the US, which in turn would probably allow the rest of the global economy to steadily recover.

However, traders have been keeping a watchful eye over cases in Australia climbing all of last week.

In particular, the Australian state of Victoria had found 75 new cases of coronavirus in just past 24 hours at the beginning of the week - the highest daily count in two months. 

In Australia's second-most populous city, Melbourne, weekend reports give the latest update as 108 new cases, which is the worst increase of cases in more than 3 months.

Consequently, Victoria's lockdowns have reset Australia's response to lockdowns are back in place.

Some other states are extending their border closure measures which have reset Australia's response to the virus, a factor that will be watched for in this week's RBA meeting. 

However, the US and Australia are not alone in the reimposing of lockdown, this is a much wider-spread resurging issue, our and the global-financial market's worst fear.

In Britain, the city of Leicester, about 150 kilometres north-west of London, has been put into local lockdown while the rest of the nation tries to relax lockdown measures. 

So has Segria, a region in north-east of Spain. China also shut down parts of Beijing a few weeks back. 

Meanwhile, On Sunday, Kazakhstan became the first nation to re-impose a country-wide lockdown.

Overall, the new localised COVID-19 outbreaks have cast a renewed cloud over the global economic outlook for the second half of the year.

This is making for a potential risk-off of start to the week in the absence of positive weekend headlines to override the sentiment.

RBA on hold, but on standby for a tidal wave of COVID-19

There should be no surprises with the RBA keeping the cash rate on hold.

However, a resurgence of recent numbers in new coronavirus cases will be a concern. So too will the strength of the AUD which has travelled some 28% since its March bottoms vs the greenback down at 0.5506. 

The Bank is likely to reiterate it stands ready to provide liquidity as needed. This was backed by actions last month, the Bank injecting short term funds to offset the sizeable maturity of reverse repos in June.

Expect significant liquidity over coming months as the Term Funding Facility is drawn down,

analysts at TD Securities explained. 

AUD/USD is the pair to watch this week

AUD/USD is the pair to watch this week in what could be an otherwise summer lull G10-FX space.

The focus here will be given to the risk to global growth sentiment pertaining to the coronavirus, the already toppy levels in the currency, the US dollar's allure in a risk-off market setting, as well as domestic new cases and the RBA.

Critical to the playbook will be whether the RBA decides to use this meeting to address the currency's current strength and whether it will want to change its relaxed stance.

Traders will be looking for an opportunity in a simple acknowledgement (like the Reserve Bank of New Zealand did recently) that it is posing a hindrance to the economic recovery.

This could be just the ticket, coupled with all other bearish factors and global risk sentiment to trigger some AUD losses.

This brings us nicely to the Chart of the week ...

Chart of The Week

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